Brian Fallow: Kiwis renewing appetite for debt

Kiwi households have regained their appetite for debt, and it is getting rapidly more hearty.

In November, household debt rose 0.6 per cent, its steepest monthly rise since February 2008, while the annual increase, 3.3 per cent, is the biggest since January 2009.

Though this is still far short of the double-digit credit growth rates that marked the boom of mid-2000s, it is accelerating pretty rapidly.

During the first half of last year we were still seeing monthly increases of 0.1 or 0.2 per cent, as we had since the recession, but over the past six months the pace has picked up to an average 0.4 per cent.

So what is driving this, and is it a problem?

The lion's share - 93 per cent at the latest count - of household debt is mortgages. Changes in the stock of household debt represent the net effect of people taking out new loans and people paying down, or paying off, existing ones.

Historically, credit growth has been closely correlated with house sales, but since 2008 the two diverged. People got the message that after five years in which house prices doubled (but incomes of course did not) the party was over.

Gravity could not be defied indefinitely and the rest of world was providing gruesome examples of what happens when a property bubble bursts. New borrowers became more cautious and increased the size of their deposits, while the banks in turn tightened lending criteria.

As mortgage interest rates fell - to 50-year-lows - people took the opportunity to repay principal faster.

And latterly the Christchurch earthquakes may have had an effect, when there is a lag between someone's home being written off and that mortgage repaid out of an insurance payout, and their taking out a new loan for the replacement.

Economists talked of households "deleveraging" and the economy "rebalancing", and they pointed to an improvement, sorely needed, in household saving rates.

In the year to March 2003, households spent $1.10 for every $1 of after-tax income. Four years later it was $1.07. But by the year to March 2011 we actually, for the first time in many years, lived within our means, with income exceeding spending by $177 million or 0.2 per cent. The 2010 income tax cuts no doubt helped. But by March last year we had slipped back into the red, dis-saving by 0.1 per cent of disposable income.

And since then household debt has been rising at an accelerating pace. In the three months ended November, household debt was 1 per cent higher than in the preceding three months, representing an annualised increase of 4 per cent. That is probably within the rate at which household income is rising - 4.7 and 4.8 per cent over the past two March years (collectively, not per household) according to the national accounts.

So long as household debt is not growing faster than the incomes out of which it has to be serviced, the Reserve Bank will probably not be too concerned. Especially as some mortgage debt is used to provide capital to small businesses.

But if debt growth starts to outstrip income growth in any sustained way, the Reserve Bank will want to fill up its monsoon bucket and set off for the mortgage belt. That is because, unlike some northern hemisphere countries, the last housing boom (as we like to call the virulent outbreak of house price inflation) was not followed by a bust.

Dodging the bullet is a good thing, but it has left housing affordability metrics - like the ratio of house prices to incomes and to rents, and household debt relative to incomes - still very stretched by historical standards.

As of June last year (the most recent figures available), the household debt to income ratio was 131 per cent. That may not sound too bad but it is diluted by the fact that only about a third of all households have a mortgage. It was down from a peak of 142 per cent of income in mid-2009, but up from 103 per cent 10 years ago.

For 10 years before the last boom house prices were a little more than three times income. By mid-2007 they had climbed to 5.4 times income and have since come back to 4.5 times - half as high again as used to be considered normal. It is not a good starting point from which to embark on another housing boom.

The Real Estate Institute's housing price index rose 6.7 per cent nationwide in 2012. In Auckland it rose 8.6 per cent - three-and-a-half times the average increase over the past five years - and more than a third of the annual increase occurred in the last three months of the year. Residential property sales last month were 8.2 per cent up on December 2011 nationally, and 18.7 per cent higher in Auckland, where turnover ran just 8 per cent below the average December during the boom years 2003 to 2007 inclusive.

It is not surprising that the lowest mortgage rates for 50 years are warming up the housing market and encouraging people to borrow more. Indeed it would be alarming if they did not; we might be worrying about being caught in a liquidity trap, where conventional monetary policy is impotent.

The Reserve Bank has made it clear it is watching credit growth intently. It will no doubt be seeking to discover from the banks how much the crude numbers reflect a loosening of credit standards, such as higher loan-to-value and loan-to-income ratios. It also needs to know if there has been a lessening in the pace at which people are paying down their loans, that is, to what extent de-leveraging is abating.

One risk is a reappearance of the wealth effect, potent during the boom years, where people with housing equity opt to spend some of the increase in their paper wealth, so that spending growth outstrips income growth. Another risk is the reappearance of a speculative dynamic among property investors.

Long embedded in the Kiwi psyche is the idea that the best way to provide for your old age is not to save money but to borrow money and engage in highly geared property plays aimed at a tax-free capital gain. It would be premature, to say the least, to conclude that the tax changes in 2010 have put paid to that.

The glass-half-full view would be that the plodding nature of the economic recovery means there just is not enough income growth in the offing to sustain another housing boom. It will not get off the ground. But credit growth and housing market data increasingly challenge that sanguine view.

The money lenders are happy to bait the gin traps with low interest rates waiting for the mugs to come and load up debt on non productive, non income generating consumerist waste.

Banks are the primary cause of the recent economic problems. Their predatory lending is what causes boom and bust cycles.

"Population dynamics - even immigration dynamics - have nothing to do with house prices. What determines house prices is not the number of babies being born, or immigrants - illegal or otherwise - arriving, but the number of people who have taken out a mortgage, and the dollar value of those mortgages. For changes in house prices, what matters is the acceleration of mortgage debt."Steve Keen - Australian economist

When banks lend money for mortgages they create money out of thin air, it does not come (as most people suppose) from existing deposits. This is why why have housing bubbles. Not because of a supply and demand problem, but because banks have been given the ability to create money out of thin air. Of course they are going to put it into the least productive sector of the economy! Most people have no concept of the con job being imposed on them.

Welcome to bonded slavery.

Dee (West Auckland) |
10:51AM Thursday, 17 Jan 2013

And as Prof. Steve Keen points out in 'Debunking Economics', personal debt is the key factor that is ignored in neo-classical economic theory and consequently all orthodox economic modelling, regardless of the fact that it was the key driver of the GFC.

Unless governments understand this and take radical steps to make debt unattractive for non-productive activities like trading housing stock in a the giant ponzi scheme, we are doomed to slide further down the rabbit hole.

Because the National Government has at best tinkered with, rather than changed the imperatives within the New Zealand real estate market, the same signals remain substantially unchanged and consequently we are headed for our next real estate bubble.

Again it is driven by speculation and powered by leverage, and it will further shut out first home buyers and lower income families. It is at this stage localised within the main centers, and it may stay so, or it may not.

While aggregate income growth may be slow, each new rental house increases the property owners ability to service debt. The current property market is about increasing personal wealth by aggregation, not wealth creation.

Merv10 () |
10:51AM Thursday, 17 Jan 2013

Very good comment. New Zealand has lurched from one housing boom to the next bust.

The culprits are well known to all of us and are the same world wide, Banks, realtors, solicitors, property developers and of course the Reserve Bank and the Government who allows the mess to happen.

Mr Bollard who was praised when he left the Reserve Bank said that his only regret was not intervening in the last property boom. I'm speechless at that comment.

Debt is apparently now what makes the world go round and it starts with the IMF and World Bank and then trickles down to the other participants. Quote from Gareth Morgan ' the world's banking model is broken'. Can't agree more!